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W is for Worthless Securities.

When we play the market, we all think to think we're going to win. The next big thing is just around the corner... right? We're banking on hitting it big by choosing the next (well, back in the day anyway), or .

But eventually, almost everyone (except maybe Buffett) makes that one really bad pick. While the nature of the market is that what goes down often goes back up, that doesn't always happen. What if it goes down and down and ... down? All the way to zero? It happens.

Stocks, stock rights, and bonds that hit rock bottom and are completely worthless during the tax year are treated as though they were sold - at a zero price - on the last day of the tax year. That can be good news from a tax perspective and maybe makes that hole in your portfolio not quite so painful.

However, it's not a matter of simply marking it as zero and calling it a day. The stock, stock right or bond has to actually be worth zero, not pennies, to be considered worthless. Just because a company is having a tough month (even going through bankruptcy) doesn't mean that it's stock is worthless. And - this is the important bit - you have to actually abandon the stock for no value (which is what it's worth right?). You can't hold onto it and hope for better things.

You claim a loss for worthless securities in the tax year they become completely worthless. And who's responsible for making that determination? You are, as the taxpayer. The IRS doesn't actually have a formula and it's a bit subjective. Be smart. You'll want to be double (triple?) certain that the security is actually worthless and keep good supporting records.

And finally, while you can claim the loss for stocks, stock rights and bonds held in almost any investment account, you can't claim a loss for worthless stock that was held in your IRA or your 401(k). This should make sense: you generally don't claim gains in those accounts, nor do you claim a loss.

The rules for claiming a loss with a worthless security can be tricky. Be sure to consult with your tax professional if you have questions about how and when to report.